American Airlines: Capital Returns, Here We Come

By Ben Levisohn

Airlines have dropped today, but that wouldn’t worry the uber-bulls at Morgan Stanley, who released another bullish report on the industry group today following a survey of airline investors.

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Morgan Stanley’s John Godyn and team expect American Airlines (AAL) to announce a return of capital to shareholders by the end of the year–and that its plan will look a lot like Delta Air Lines’ (DAL)allocation:

In recent months we’ve emphasized the growing importance of capital returns among airlines. Along these lines, we’ve argued that our significantly above consensus earnings outlook for American Airlines implies an ‘almost certain’ probability of a capital returns announcement in 2014…

We suspect American Airlines is leaning towards a Delta Air Lines-like balanced capital deployment plan with a small dividend reinforced by a much greater buyback authorization…Though the rationale varied, the responses largely referenced three considerations in voicing a preference for buybacks: (1) Purchasing shares at what many believe to be a substantial discount to fair value is a more accretive and tax-friendly distribution of capital, (2) Not only is a buyback accretive to EPS growth in the shorter-term but the cash deployed benefits from multi-year compounding, and (3) A buyback can be utilized to stabilize shares in 2015 should American Airlines experience integration issues – something which remains a concern even among the bulls. That said – it’s hard to argue with the bullish signal-value in even a modest recurring dividend. Thus, we suspect American Airlines will find a way to appease all views much like Delta Air Lines did – with bullish implications for shares much like was the case for Delta Air Lines.

Starting next March 1, elite-level members of MileagePlus will earn between 7 and 11 miles for every dollar they spend on tickets, not counting taxes. Regular members — people who fly less than 25,000 miles and spend less than $2,500 a year on United — will get 5 miles per dollar toward free travel.

United joins Delta, Southwest (LUV) and JetBlue (JBLU) in basing awards on money spent, not miles flown.

Shares of American Airlines have dropped 0.6% to $43.33 at 11:56 a.m. today, while Delta Air Lines has fallen 0.4% to $41.70, United Continental has declined 0.7% to $46.07, Southwest Airlines has slipped 0.8% to $27.22 and JetBlue is off 0.7% at $10.39.

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.